LFMI: Three worrying aspects in the national budget proposal

The 2014 state budget proposal contains three worrying aspects, according to the Lithuanian Free Market Institute.

The state budget revenue plan is over-optimistic. Compared with the 2013 plan, the 2014 revenue from excise duties is expected to growth by 3 percent, from VAT, by 9 percent, and from the profit tax, by as much as 18 percent. The optimistic excise revenue plan has been criticized by the State Control. In its audit report the State Control concludes that the VAT revenue plan “may be fulfilled” provided necessary economic conditions are in place. Following the conclusion of the State Control that the profit tax revenue forecast is “feasible,” this forecast has been raised by 8 percent. However, starting from the next year capital gains are to be taxed and transfer of tax losses is to be restricted, so business conditions will deteriorate and generating the planned revenues will become quite unrealistic.

National budget expenditure (excluding EU support) shows a threatening increase. The plan is to increase national budget expenditure (excluding EU support) by a total of 1.4 billion litas, from 22.1 to 23.5 billion. The planned 6 percent increase is almost twice as large as the projected economic growth (3.4 percent). It is also the most drastic increase since 2008. This pre-conditions a continued growth of state debt and ineffective use of budget funds.

The right of budgetary institutions to undertake financial obligations in the course of the year poses a risk of chaotic expenditure cuts, salary delays and deficit growth. Given the over-optimistic budget revenue forecast and the inherent risk of revenue shortfalls, it is crucial to limit budgetary institutions’ right to undertake financial obligations. The 2011 and 2012 budgets stipulated that the obligations undertaken in the first half of the year could not exceed 46 percent of the annual allocation, and those assumed during the first three quarters could not exceed 67 percent. This provided an automatic safeguard against increasing deficit, therefore the same provision should be included in the 2014 budget or priorities by which budget expenditures will be cut in case of revenue shortfalls should be defined in advance. A lack of such provisions poses a risk of chaotic expenditure reductions and salary delays. It also evokes a budget deficit and a corresponding growth of state debt. Next year state debt will exceed 50 billion litas and will have doubled since mid-2009.

LFMI recommends:

  • reducing planned VAT, excise and profit tax revenues based on the projected economic development, consumption growth and the size of the shadow economy, and
  • reducing planned national budget expenditures to reflect the expected growth of the economy. This means that budget expenditure should not increase by more than 750 million litas and should total no more than 22.9 billion litas. Such an increase is three times larger than the demand for salary increase for public servants. It is also advisable to contemplate freezing national budget expenditure at the 2013 level. The resolution of the Constitutional Court regarding the increase in salaries for civil servants can be fulfilled by keeping the overall salary budget at the same level and reducing the number of civil servants.